Working Capital Management and Firm Performance: An Analysis of Ghanaian Oil Marketing Firms
Solomon Kwasi Kyei
University of Ghana Business School This e-mail address is being protected from spambots. You need JavaScript enabled to view it
Purpose: Businesses face ever increasing pressure on costs and growing financing requirements as a result of intensified competition in globalised markets. Many of them therefore consider ways of making themselves more efficient. In identifying possible options it is easier to focus exclusively on income and expense items with no consideration on the balance sheet items. However, improvements to the existing capital structure can free up valuable resources and bring increased efficiency. The study was an attempt to measure and analyze the trends in working capital management of Ghanaian oil marketing firms and its impact on their performance. This is very crucial because of the purported high profitable levels of the sector and likely under-utilization of such profit potential. In such a sector, there is also high possibility of over-trading which still under-utilizes the profit potential of the sector.
Design/Methodology: The study employed trend and econometric analyses using an unbalanced panel data of 11 Ghanaian oil marketing firms form 2001 to 2008. For the econometric analysis, the study adopted the number of days inventory, number of day accounts receivable, number of days accounts payable, cash conversion cycle and the net trade cycle as measures of working capital management; and gross profit divided by total assets as profitability.
Findings: The study found inconsistent trends in the various components of working capital and a level of over-trading in the Ghanaian Oil Marketing Companies (OMCs). It also found a significant negative relation between profitability and number of days accounts receivables; number of days payables, the cash conversion cycle and the net trade cycle.
Research Implications: The paper is expected to spur interest in the studies of various ways of creating shareholders’ wealth in an industry that seems to be the industrial point of attraction of Ghana. The study also recommends detailed studies in working capital management structures and policies of Ghanaian firms in general and specifically, the OMCs as well as an exploratory study on how global best practices in working capital management can be implemented in Ghanaian firms.
Practical Implications: The result of this study suggests that, reducing a firm’s cash conversion cycle or net trade cycle to a reasonable minimum is a very important way to maximize shareholders’ value. It is therefore imperative for managers of Ghanaian OMCs to design and implement strategies and policies and that will aim at stabilizing and managing the various components of working capital. The study also recommended that managers pay particular attention to the efficient management of working capital since it significantly impact on the main aim of business which is creating shareholders’ value.
Key words: Working Capital, Management, Profitability.
Contact Person: Solomon Kwasi Kyei is a graduate of the Faculty of Renewable Natural Resources Management (Dept. of Wood Science and Technology) and currently, a research analyst with INTEQ GH., a research and management consultancy firm. For correspondence regarding this paper, contacts can be made through: Tel.: 233-20-5600002/233-24-9276087; Email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it
